Feb 15, 2008

Bank reconciliation

Why is it important to reconcile your bank balance in accounting terms?

For a video tutorial of how to perform a bank reconciliation in MYOB Accounting, click Step-by-step tutorial for bank reconcilaition

First of all, we need to define Bank reconciliation.... It is the process of matching and comparing figures from accounting records against those presented on a bank statement.

Bank reconciliation allows companies or individuals to compare their account records to the bank's records in order to uncover any possible discrepancies.

The bank statement sent by the bank is a third party record of the payments and receipts made from the company's account.

The bank statement can flush out payments (or bank credits) which we would otherwise not known, for example, bank charges for outport cheques, stamp duty for issuance of chequebook, and interest for bank overdraft etc.

A bank reconciliation report will show:
1. Cleared Cheques
2. Cleared Deposits
3. Outstanding cheques
4. Uncleared deposits

All uncleared and outstanding entries in the bank reconciliation should be investigated for its authenticity, more so if it dates back more than 2 months.

If cheques remained uncleared for a long length of time, it may be because the cheque never reached the supplier, in which case, you may need to cancel and re-issue a new cheque. More importantly, it also sends out warning bells as to whether the services (expenses) was genuinely incurred or not in the first place.

Uncleared deposits, on the other hand, may mean that the collections were recorded but not banked in on time. If the period between recording and actual bank-in is too long (say, more than 3 days, for local cheques) you need to review your banking process to ensure that receipts are banked on timely manner. You may also want to investigate whether the moneys were received in the first place, because the recording in the books could be a mistake, or a fraudulent entry. And you need to take steps to ensure that the mistake / discrepancy is not repeated.

Another thing to note, the reconciliation procedure should NOT be done by
- the person who has access to the cheque book, or
- the person who signs the cheques,
- or the person who is responsible to deposit the moneys received

Preferably, bank reconciliations should be done by someone who doesnt't have any direct access to the Company's bank accounts.

In one case, the financial controller only found out about a cheque that was issued and cleared without his knowledge, when he was going through the bank statement. This resulted in an investigation and was traced to the work of the owner's son.

In smaller companies, it is not possible to segregate the functions, so it is very important for the business owner to review the reconcilation (bank balance, customer balances, supplier balances) to flush out any discrepancy, between the inter-related amounts.

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